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Peter, very good to see you as always. Today I want to talk about the biggest stories of 2022 and any predictions for 2023. I think it's tough to pick just one big headline from the past year, but here are my tops. Inflation, interest rate hikes and the collapse of crypto. So what do you think was the biggest financial headline of the past year? Well, I think that the interest rates and inflation are definitely interconnected, and those are really the big story of 2022. And it further led to the market volatility, right? The inflation was rising after COVID, a ton of money being pushed into the economy, savings rates at all-time highs, which is fantastic, but people had more discretionary dollars available and the supply chain issues led to significantly increased prices.
Then the government wants to come out, the Fed wants to better control and tame those rising prices, get inflation under control so they start raising interest rates, which has negative impacts on the stock and bond markets leading to the market volatility. The crypto collapse, I think impacts a very small portion of people and then I continue to really believe that while there's a lot probably going on behind the scenes there that I wish I knew the full truth about, we probably won't hear a lot of the full truth about, doesn't impact a whole lot of people. And with crypto, it is still a kind of new type of investment that was originally intended to be off the radar. So when a whole bunch of it disappears, it doesn't necessarily surprise me, unfortunately. I see. Okay. So as you mentioned this, we were all just riding high in 2021, but our appetite for risk took a big hit this year.
So what's the most common question that you're hearing right now? I think I'm hearing a lot from risk adverse investors, right? We all did enjoy the fantastic ride from 2018 through the end of 2021. The market was just phenomenal. And when the market is doing well, everybody seems to have an aggressive risk tolerance.
Oh, I enjoy, I appreciate taking risk. I want to try to beat the market and then the market turns the opposite direction and all of a sudden people's risk tolerance all but disappears. Now we're losing money. The market is not in our favor and we have significantly more conservative risk tolerance. So that shouldn't be the way that it is. The direction of the market should not set our risk tolerance and risk exposure because we know that the market is going to go both up and down. But people react emotionally.
They are reactive rather than proactive in really making sure that their risk exposure is in alignment with their risk tolerance. And right now, because the market has experienced a pretty awful year in 2022, I am hearing from a lot of people who suddenly realize they are not as tolerant of risk as they were at the end of 2021 and that their portfolio may not necessarily represent their true and accurate tolerance level for losing money. Right.
All right. Well, you mentioned both stocks and bonds taking a hit this year. So I want to zero in on bonds right now.
I want to know if you see them making a comeback. And I want to show you this visual, Peter, because this one I always enjoy looking at asset classes year to date. And you can look sorry about that. You can look and see how bonds have lost so much value. So we've talked about that and also the fact that it's been one of the worst years for the 60-40 portfolio.
So what are your predictions here? Well, and the modern portfolio theory or asset allocation, basically the 60-40 model portfolio of have some stocks and have some bonds has been around for about 67 years now. It's actually about retirement age.
Right. And for the last 20 or so years, it has not worked as designed or nearly effectively as many anticipate or expect, meaning that the thought process was that stocks and bonds would move in an inverse uncorrelated direction if the stock market's down. Well, bonds are not going to lose value. What we've seen in several instances over the last 22 years is that they have started to move much more in tandem. And 2022 was kind of a banner year for that modern portfolio inverse relationship not working effectively, bonds down anywhere from 12 to 18 percent over the course of the year. And that is in large part due to the Fed raising interest rates as interest rates rise. The value of existing bonds falls because if I have already purchased a bond that is paying a three percent income yield and then interest rates go up to now where new investors could go out and purchase a four percent bond, then they would be less attracted to buy my bond existing paying three percent.
So in order to incentivize somebody to buy my bond, I have to lower the price so that they get an equivalent yield to maturity. I mean, that's kind of complex. But think of it like your home. Right. We saw fantastic appreciation in home values across 2021.
Right. House prices were at all time highs. But as the interest rates went up, the payment that people could afford to make went down. And so a lot of pressure was put on home values to bring them down. It's not a perfect analogy, but it is one that works in the same kind of teeter totter way, whereas interest rates rise, bond values and home values are challenged.
They get pressure downward. And so I don't expect 2023 to be some vast rebound with bonds and bond funds because the Fed has already stated they plan to continue raising interest rates throughout 2023. That's what hurt bond values in 2022. And if they continue to do that, I don't expect to see the precipitous decline as large a losses in bonds and bond funds. But I hope that they stabilize a bit. And we will see that yields the interest that bonds are paying does improve as as interest rates continue to rise. But I don't see the value suddenly rebounding back to where they were. It'll probably hopefully be a year where they just sort of are stable. And maybe in the 12 to 18 month range, we begin to see them climbing back up as the Fed begins to stop and taper their interest rate increases. I think that will be the cue for when bonds do begin to recover. And, you know, when things go bad, oftentimes they turn around just as sharply and hopefully make some good recovery for bonds when that does occur. Right. We have talked about that many times. So my last question for you, I want to talk about the recent midterm elections and how it could affect the markets.
Take a look at this here. History does tell us that the markets prefer a divided government. So this is a look at the S&P annual return when a Democrat is in the White House. So does this mean, Peter, that we can expect a rally?
Well, I think that the market dislikes change. And when there is a divided political environment in Washington, that means there's going to be a whole lot of huff and puff and talk and debate. But can anything significantly impactful and meaningful actually get pushed through? The chances are significantly less than if there was kind of one party in power, right?
Either party. If they are in power, they've got it across the board, across the different branches, then agenda items can be pushed forward and there can be big, impactful changes. But when we've got a divided political environment there, there's not as good a chance for big, sweeping changes to move through because they've got a debate. They've got to negotiate.
They've got to cut different parts out of any agenda in order to compromise. And the market feels a little safer that nothing is going to dramatically change. And I think that's why when we see that divided house and divided branches that we do see better performance out of the market is that there's less likelihood of any big, significant changes, surprising things in the investment financial world.
That makes sense. All right, Peter, any final thoughts that we should be keeping in mind for 2022 or even 2023? Yeah, looking ahead at 2023, because the Fed is planning on continuing to increase interest rates, because it's been a fairly long time since we've seen a significant correction in the market.
And quite frankly, we were overdue and overstimulated. And because of those things, I do continue to see a challenging year ahead. We're going to try to identify opportunities and protect what's important at Rishon planning. If there are upward trends and movements in the market, capture what we can. But importantly, for especially those risk adverse investors, avoid as much of the losses as possible. And due to these higher interest rates, there are some fantastic opportunities where we can go to more conservative kinds of investments.
Some options even where it's a protect the principal and either live off of or grow with interest kind of approach where we are getting reasonable interest rates. So I think 2023 is going to be about setting reasonable expectations and goals and then just making sure that your portfolio is in alignment to allow you comfort and confidence that you are not invested beyond your risk threshold and tolerance. And that's really the agenda item that we have at Rishon planning, as well as looking at everybody's plan for long term care. That is not getting any cheaper. It is the elephant in the room. And right now, 14 states have initiatives to start taxing people if they do not have some type of long term care coverage or insurance.
I'm not sure how many of those will actually pass, but this is a big issue that I think everybody needs to at least have thought through and addressed their plan for how they plan to face it. So I'm having that. Those are the big stories of 2023 on my side, Erin. Perfect. Well, Peter, I have a lot to say to you right now. First, I love working with you. I want to wish you and your family a very Merry Christmas.
Merry Christmas to you, too. Thank you. I enjoy working with you as well. You're great. Well, you make me smarter every day, you know, so that's that is you're such a great resource. And then again, just to remind everybody that you are always available to answer their questions as well, not just mine. So if they have any questions, what's the best way to reach you?
Yeah. Give us a call at Rishon planning. Nine one nine three zero zero five eight eight six nine one nine three zero zero five eight eight six. You can email me, Peter, at Rishon planning dot com. It looks like rich on planning. Last name Rishon planning.
You can go to the website Rishon planning dot com. All right, Peter, thank you very much. Always a pleasure. Thank you. Merry Christmas.
Happy New Year. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment tax or legal advice from an independent professional advisor. Any investment and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooke's own capital management. A registered investment advisor, fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.
Whisper: medium.en / 2022-12-22 08:41:27 / 2022-12-22 08:46:23 / 5